Ian Cowie was named Consumer Affairs Journalist of the Year in the
London Press Club Awards 2012. He has been head of personal finance at
Telegraph Media Group since 2008, having been personal finance editor
since 1989. He joined the paper in 1986. He is @iancowie on Twitter.

Why Barbie Dolls and Victoria’s Secret tempt income investors

Income-seeking investors should take a look at Victoria's Secret lingerie

Barbie dolls and Victoria’s Secret lingerie might, at first sight, seem to have little to do with the serious business of seeking income from equities. But the more you look the more you see. Both brands are owned by companies that deliver inflation-beating dividend yields with the added appeal of being denominated in dollars.

Income-seeking investors have tended to ignore the world’s biggest economy in the past because American shares often paid trivial dividends. However, that is changing, with Apple the latest growth stock to commit to deliver value to shareholders by means of regular distributions. Now rising numbers of fund managers say income-seekers should reconsider opportunities in America, if only to reduce excessive reliance on a relatively small number of high-yielders based in Britain.

Diane Sobin, manager of the Threadneedle US Equity Income Fund, said: “A US-based income strategy offers investors a diversified portfolio, not merely traditional slow-growing utilities and telecoms. Opportunities in consumer, healthcare, technology, industrials, materials and financials are all available to US income investors.

“For example, toy manufacturer, Mattel, has solid sales growth in core Barbie Doll products and a robust new product pipeline. The company has dominant share of the toy industry and generates high returns. The stock yields about 4pc and the dividend has been growing by more than 10pc over the last years.”

Similarly, Rebecca Young, manager of Neptune US Income, said: “America’s economic backdrop compares very favourably with other developed markets. At the same time, corporate fundamentals remain strong and US companies are reporting another good earnings season; two thirds of companies which have reported first quarter earnings beat expectations.

“Companies are awash with cash which they continue to return to investors through both dividends and stock buybacks. For example, Limited Brands – the US retailer who owns and operates Victoria Secrets stores – has very strong growth prospects and a good cash generator. Last year, the company paid out dividends and a special cash distribution that equate to a 8.3pc yield.”

With companies as diverse as General Electric, HJ Heinz, Intel and Phillip Morris also featuring in these equity income fund managers’ portfolios, you may well ask what changed American attitudes to income. Bill O’Neill, chief investment officer at Merrill Lynch Wealth Management, explained: “In the past, US companies had been accused of favouring share buy-backs over dividends, distorted by effective double taxation of dividends.

“Changes in legislation have addressed this anomaly. With dividends as a proportion of companies’ earnings near all-time lows, there’s still plenty of room for increases if managements so choose.

“Certainly, the demand for dividends grows louder. International investors are seeking out US shares as a relative safe equity investment – and these investors expect a dividend.”

Mark Robinson, chief investment officer of Berry Asset Management, also expects America’s new trend toward higher dividends payments to continue: “American companies are generating huge amounts of free cashflow, allowing them to buy back record amounts of stock, raise dividends or engage in merger and acquisition activity. Stockmarket valuations in the US may not be as cheap as in Europe, but the corporate backdrop is encouraging.”

Against all that, only the most sophisticated – and committed – British investors are likely to favour direct shareholdings in American stocks. Exchange rate fluctuations and foreign jurisdiction tax liabilities are among practical problems – which also include difficulties in keeping abreast of developments in a market which trades in different timezones.

Pooled funds – such as unit and investment trusts – offer low-cost and convenient ways to share the cost of professional fund management of assets overseas; indeed, that was the original idea behind some of the earliest of these funds.

They also provide automatic diversification to diminish the risk inherent in stock market investment by spreading individual investors’ money over large numbers of underlying investments, to reduce exposure to setbacks or failure at any one company.

However, it can be argued that many UK equity income funds are inadvertently breaking what is sometimes described as the first rule of stock market investment – ‘spread risk’ – because they have too much money tied up in too few shares.

For example, three of the biggest sectors for income on the London Stock Exchange are all dominated by just two shares. Specifically, GlaxoSmithKline and AstraZeneca comprise the majority of the stock market capitalisation of UK pharmaceuticals; Vodafone and BT make up most of UK telecommunications; and BP and Shell take the lion’s share of oils.

Bear in mind that those last two businesses paid 20pc of all UK dividends three years ago – until BP was forced to scrap its dividends after the Gulf of Mexico disaster. Similarly, a handful of banks had paid 25pc of all Britain’s dividends until the credit crisis began five years ago.
So there is a case to be made for greater geographical diversification by income-seekers. Considering some increased exposure to new opportunities in the world’s biggest economy would be a good place to start. Steven Andrew, manager of the M&G Income Multi Asset Fund, certainly thinks so.

He said: “Currently one-third of my equity exposure is in the US – my largest geographical allocation – invested in companies such as Procter & Gamble, AT&T, Colgate Palmolive, as well as 19 others.

“Dividend yields on these stocks vary from around 2.5pc to over 10pc. There are tremendous opportunities for generating not only capital return but also access to a future income stream.”

If American shares and equity income funds can deliver that double – a decent yield with capital growth – then this really would be an asset allocation model worth a second look.